One of the great follies of the economics biz invariably takes place at this time of the year: It's annual-prediction season.
Economists will willingly give them. Journalists will dutifully write about them.
The public will happily consume them.
And they will be wrong.
Even if they are numerically in the ballpark, they will be right for the wrong reasons.
Because every year, unforeseen events throw spanners into the best-laid forecasting works, altering the speed, trajectory and even the entire course of local, national and global economies.
It's like driving on a Canadian highway at night: You're on the right road, you know where it is going, you know the speed limit – but all it takes is one moose to step in front of your car, and you're not going to get there.
When the year began, the Canadian economy was in the midst of an impressive surge and forecasters were talking about real gross domestic product growth of 2 per cent. The reality turned out to be far short of that; economists now estimate that growth for the year was more in the order of 1.3 per cent.
But then look at the wildlife that wandered across the economic highway.
President-elect Donald Trump.
Yes, The Donald was the front-runner for the Republican U.S. presidential nomination when the year began, but the smart money was on his circus act losing its appeal once the primary season kicked in. Then he won New Hampshire, starting in motion a runaway train of popularity; by the end of March, he already had a virtual stranglehold on the nomination. Still, he remained a long-shot to win the election almost right up until the moment, in early November, when he did.
Forecasters have been scrambling ever since to try to calculate what Mr. Trump's policies will mean for the economic fortunes of the United States and its trading partners – his anti-trade, anti-immigration campaign rhetoric; his threatened hard line on China; his pledged corporate tax cuts; his infrastructure-investment proposals; his almost certain large budget deficits. Complicating matters is that it's never clear which of Mr. Trump's campaign promises/threats should be taken seriously. But we do know that the prospect of his presidency has already driven global bond yields higher – effectively raising interest rates for pretty much everyone, which poses an impediment to the efforts of the world's central banks to stimulate growth in the coming months.
The country's Alberta-centred oil industry had been battered so badly by the collapse of crude prices in 2014-15, one could be excused for thinking that its capacity for rattling Canada's economy had largely been spent by mid-2016. One would be wrong. The wildfires that decimated the province's key oil-producing centre of Fort McMurray, beyond being an enormous environmental and human tragedy, also distorted the national economic picture for months after the blaze was brought under control and the city's residents returned from evacuation.
The loss of economic activity due to the fires – primarily, the temporary shutdown of more than one-third of Alberta's daily crude output, and, by extension, exports – was so acute that it caused the entire Canadian economy to shrink in the second quarter of the year, despite the relatively small and isolated region that was directly affected. Real gross domestic product shrank at an annualized rate of 1.3 per cent in the quarter, the worst since the 2009 recession; Statistics Canada said that if not for the oil slowdown, the quarter would have generated modest growth. Subsequently, the rapid return of all that output fuelled an oversized rebound in GDP growth – up 3.5 per cent annualized in the third quarter. The economic data have been so deeply coloured by wildfire effects that it's still hard to see what they truly look like underneath.
The trade fade.
One of the key expectations for the Canadian economy heading into 2016 was that the long, deep drag from the oil slump would be overtaken by the growing upward momentum of a revitalized export sector. The cheap Canadian dollar and accelerating U.S. recovery was supposed to strengthen demand for Canada's non-resource exports, taking over from the oil weakness as the main driver of Canada's economic story and reviving in business investment outside the still-downtrodden resource sector.
But then trade inexplicably took a turn in the wrong direction. Canada has spent most of the year racking up some of the biggest monthly trade deficits in its history, as non-resource exports, far from providing the country's economic solution, emerged as a new and perplexing problem. Goods export volumes, excluding energy and mining, were down nearly 6 per cent in the first 10 months of the year. For a while, economists were eager to blame a mid-year lull in U.S. demand as businesses drew down on oversized inventories, but the problem persisted. By mid-October, Bank of Canada governor Stephen Poloz mused that "more of our export shortfall may be structural than previously believed, rather than cyclical" – essentially suggesting that big parts of Canada's goods-exporting sector had lost their competitive edge, and it wasn't about to come back simply because the U.S. economy was growing again. There is now a large, looming question mark about what sort of contribution we can truly expect from trade in Canada's continuing economic recovery.
The notion of a British withdrawal from the European Union was on few radar screens when the year began, and even when Prime Minister David Cameron's Conservative government announced in February that it would hold a national referendum on the matter, few observers imagined that Brits would vote to leave the world's biggest economic and trade alliance after nearly 44 years. But in late June, the country's citizens voted narrowly in favour of doing just that. The result sent tremors through financial markets amid predictions of dire consequences for the British and EU economies – including warnings from Bank of England governor (and Canadian central-banking boy wonder) Mark Carney of an imminent British recession.
The feared economic shock wave never materialized, but a longer-term malaise may already be settling in. The potential for years of uncertainty surrounding the Brexit, and how it will play out in the complicated negotiations still to come, has cast an additional chill on already glacial global trade flows; world trade volumes have actually declined since the start of the year. And Brexit is barely getting started; the issue could cloud global trade, geopolitics and investment for years.